A CRPF officer and two militants were killed while nine others were injured after militants opened fire on security forces in the Downtown area of Srinagar -- close to the historic Jama Masjid -- on Monday.
Authorities said an unspecified number of militants had opened fired on the security forces.
A police official said a total of 10 security personnel had been injured in the attack, with the CRPF officer dying from his injuries later.
Authorities added that two militants had been killed in the firefight.
Police said the two militants had attacked a police station in the old city of Srinagar as Prime Minister Narendra Modi was delivering his annual Independence Day speech in the national capital, New Delhi.
The gunmen were unable to take control of the police station, the summer capital of Jammu & Kashmir, but did wound six police reservists in the attack.
Operations were continuing against the attackers, who were holed up in a nearby building, police said. No further details were immediately available and there was no claim of responsibility.
Kashmir has witnessed violent protests since the July 8 killing of militant leader Burhan Wani, a commander of the Pakistan-based Islamist militant group Hizbul Mujahideen, with 54 people killed and several thousand wounded in clashes with security forces.
Modi avoided direct reference to Kashmir in his Independence Day speech, but he did criticise people in Pakistan for celebrating when what he called terrorist attacks were launched on Indian soil.
The prime minister met national party leaders on Friday to seek ways to end the worst unrest in Kashmir since 2010, but there was no agreement to send an all-party delegation to the region for talks to try and calm tensions there.
Both India and Pakistan rule Kashmir in part but claim it in full. The nuclear-armed neighbours have fought two of their three wars since independence 69 years ago over the Muslim-majority region where the Line of Control, or de facto border, still runs roughly where the guns fell silent in 1948.
Army foils infiltration attempt, 2 militants killed
Separately, the army said today that it had foiled an infiltration bid along the Line of Control in the Uri sector of Kashmir, killing two militants.
"Alert troops noticed some suspicious movement along the Line of Control in Uri Sector in north Kashmir's Baramulla district this morning and challenged the intruders," an army official said.
He said the intruders opened fire on army positions, and that soldiers returned fire.
"Two militants have been killed in the operation which was going on till reports last came in," the official said.